Buying/Selling a large site.

Or the ones who open multiple DP identities to support their own posts . Welcome to DP, BTW

 

Ha ha! You have multiple DP accounts to support your own lame arguments? Figures! Thanks for the welcome!

 

In general, I'd agree - but there have been two divergent trends I've noticed (Caveat - these are for revenues / profits significantly different from the 250K number)

1) For smaller sites, especially where it's adsense type revenue, 10x monthly revenue seems to be the norm here on DP and a few other forums - this seems prevalent where the revenues per month are in the $xx to $xxx range.

2) Extremely large or innovative sites (YouTube for instance, or Hotmail back in the late 90's) were acquired based on number of users or other metrics, usually non-financial.

It would be interesting to get actual info about deals in the mid range, if anyone has first hand information and can share - what I've noticed is that in most cases, the price is kept confidential.

....

With staff, a profit of $250K could mean revenues anywhere from the half million level upwards; a good business model would have potential for growth, which could again boost up the price.

 

I've done transactions here and in Sitepoint totalling in the six figures (go through old posts if you have the time) and I'll tell you one thing: You have to bite the bullet and disclose so you might as well disclose up front. Not too much, but enough to entice buyers to contact you and fill in an NDA. Bear jurisdiction in mind. If he's based in Outer Mongotestan he knows you can't sue him but if both of you are based in the US or UK there is better protection.

They look for assets. And they don't generally take sites as collateral. You could verify that by making a few phone calls to what you call "commercial banks" (all banks are commercial entities, some offer personal banking). Sites are considered intangible assets, like goodwill, hence not as attractive as property/plant.

BTW, you may want to research terms a bit before you use them e.g., your "opportunity cost". Either there is one, or there isn't one; you can't have both!

True in that past profits may not be existent. The finance people are always at the core of any deal. Even if there were no profits, past financial records are carefully scrutinised for costs/hidden costs/other liabilities. And, in the end, the final valuation does include the new owners' future profit expectations.

 

A Non-compete ( and NDA) is essential, simply because you will have to reveal a lot of intimate data about your business and your strategies in order to get a firm offer. The buyers and their team of professional advisors will ask you questions you could never even imagine in my experience. There is no point in hiding anything because sooner or later as the sale progresses you will need to REVEAL even more information and I dare say give some warranties about what you have claimed / said. (i.e. they can claim back from you the seller, if at a later date they can prove that something you said was not true or that you neglected to let them have appropriate information).

This process is usually referred to as DISCLOSURES - and if you leave anything out, there will be problems later. When I sold a business recently, I ended up disclosing things that may not really have needed to be disclosed, on the basis, that if I disclose it now, the buyers cannot at a later date come back and say I failed to tell them.

In the DUE DILIGENCE - You will be asked for details of any current or past litigation you may have been involved in? Details of bad debts, Details of employee’s contracts, details of sub-contractors contracts - the list will go on and on. (For a professionally run business - It is not really a big deal any of these)

In my experience, you will get more money for the business, the better and cleaner your systems are. Basically everything about your business should be documented. Imagine you got run over by a bus tomorrow - and someone had to pick up the pieces after you had gone, would they be able to that?

If a business owner does not have all of this covered at present - then I would suggest they put sometime aside ASAP to concentrate on it. One day, when you do eventually sell - you will need this documentation and of course it will give the potential buyers more confidence in your business if they can see you have this information.

Finally, selling a company costs money - and it will often cost you money, even if you don't sell. When I sold my company, the professional fees exceeded $60,000 - and in the UK the owner / shareholder personally pays this money, not the company.

Having said all this - if you are looking at these sums of money - either as a buyer or a seller - my main advice would be to get a Business Attorney / Lawyer onboard and advising ASAP.

I hope this helps

~midascode~

 

Indeed! Most chief execs complain that selling is a full time job and a major distraction from running the business. In fact, competitors often make buying enquiries purely to distract managment and that's why there are laws about how far they can go and when they have to crystallise with firm offers.

Financing the sale is often something that sellers do. If you don't mind my asking, midascode, did you have to accept any part of the purchase price in deferred payments? And, if you did, what type of security did you require?

The ol' text book example is MacDonalds' where every job, however complex, is broken into "bite size chunks" and documented. And management consultants swear that despite the protests of some businesses no business is so complex that this can't be applied to.

Selling does cost money, yes. There are some ways of mitigating that expenditure. Being well prepared helps. Finding a broker who works purely on a percentage of the done deal is also beneficial (I know one or two UK ones who do). Do you have any other tips?

 

Just some incorrect statements in this thread:

"At profits of $250K the business has staff."
Simply not true. There are web business run by a single person to run profits into the millions.

"Valuing is done using several well established principles"
Sort of misleading. NPV is certainly a consideration but remember that NPV is based on FUTURE value which means how man can the acquiring company earn from the business. This often has little to do with what the selling company has made in the past. As a simple example a site with ad based revenue that earns entirely from AdSense that sells to a company with an established in house ad sales force.

For sites that are leaders in their niche, that have strong network effects in place or that are otherwise hard to replicate valuations can run to multiple years of revenue.

 

Absolutely! And that's the whole idea.

Buyers are paying money because they hope to make money. The amount they pay is based on how much they hope to make i.e. future earnings. Past earnings itself has zero value unless it helps with calculating likely future profits.

An example: A gambling site that made a million dollars in each of the last five years but will make zero dollars in the future beacause of new laws in the US. Why would the site be valued on past earnings and why would you pay a million dollars for it?

 

Hi Foggy

I've been asked that question quite a number of times recently and hopefully my answer/s will help you and some others here.

First the "bad news":

Very few buyers of big sites or web businesses will ever give you the full money in cash up front, it just does not happen that way - well not on BIG deals when you get into 7+ figures (and I dare say, for 5 and 6 figures also)

Indeed, if I have my facts correct, in the recent Google / YouTube deal, the YouTube Founders got Stock in Google - not cash. (mind you, some might argue that Google Stick is better than cash)

Of course, depending on your point of view, the above is not necessarily "bad news". Some business owners just get bored with what they are doing, or consider they have taken the business as far as they can and are looking for something new. That was the case with me. You could say I am a great starter of businesses, but when they mature and become actually quite successful, some boredom creeps in. (Sad, I know!) But I am not unique, I have met other business owners, in similar situations who just got bored.

So in my example - at exit (sale of business) I was actually looking to keep a stake in the company I was selling - simply because it still had a long way to go and with a bit of luck the new management, would make an even better job of it than me - resulting hopefully in a "second payday" for me when the new management sold out. (The new management it has to be said, are professional managers, unlike the serial entrepreneur that I am)

To be fair I was never ever offered the full valuation in cash, but even if I was, I'm not sure I would have wanted to take it - or perhaps I would have wanted an even higher valuation.

With regards to "security" - well that's a difficult one. The buyers actually offered me Preferential Shares - that were redeemable should the new management fail or not meet certain levels of performance. In the end I declined the "Redeemable" bit, but this was to do with UK Tax laws - basically if the shares had been redeemable, I may have had to pay a higher rate of tax. So to answer your question - there is no Security in the normal sense and in my experience that is also pretty well the norm. I think as a seller, it is best if you can live with the concept that the only CASH you may ever see, is the initial cash and anything over an above that is a bonus. For that reason, you should of course look to get a significant cash sum on doing the "deal".

Of course in my example - I am talking about selling a business, not a website and selling a web business is quite different from selling a website or two. I should think that if you are selling relatively low value websites, then you would want all the cash, there and then.

I am not going to reveal the exact deal I did - but I would say that in my experience, the following format is not uncommon.

CASH - PREFERENTIAL (INTEREST BEARING) SHARES - REGULAR STOCK (SHARES)

Cash: Typically anything from 20 - 50% of valuation
Preference shares (loan) - paying interest - anything from 20 - 50% of valuation
Regular Shares - say around 30% of the new company (in many cases, a new company is created, which will own the company you are selling and you will own shares in that new Holding Company)

The last part of my example above assumes the STOCK / SHARES is still in the business you owned or a NEWCO created out of the business you owned. If for example the buyer is an established company, who offer you stock as part of the deal, then the percentage bit I'm quoting would I'm sure be quite different.

So for example:

40% Cash / 30% as a loan and paying you interest (Preferential Shares) and 30% stock in Newco is fairly normal

Interest on the Preferential Shares varies - but anything around 10% paid monthly is good ;-)

Typically the new management will seek to redeem the interest bearing shares ASAP - as the interest rate being paid out is usually above a commercial rate available from banks. They will pay you out of this either by refinancing their borrowing after two or three years or from profits in the company. (Yes, you are being paid out of the profits of the company you created and which you would most likely have still enjoyed, if you had kept the company - again fairly normal.)

Some sellers have an issue with the company they sell, paying them out of the profits, later down the line - but in my experience, unless you are pretty unique or lucky, that's just the way things are done.

A side note to my deal: I agreed to do one day a week consultancy for two years. (Pretty well paid consultancy)

Another Point To Consider:

Almost all new owners will want some "hand over" assistance - even on small purchases, never mind, BIG purchases!

As an example recently I wanted to buy a very nice "authority" site - with a PR7 and frankly TOP of it's niche. Owner wanted circ $50000, which in itself was not that big an issue, but quite remarkably, did not want a consultancy contract or to help out any more with the site - post-sale. In the end, that was the main reason I did not proceed with buying his site. And I was more than happy to pay additional for that consultancy.

Think of it from a buyers point of view, you are the seller, make it as easy as possible for them to do the deal. Offering to help out, to assist, gives them more confidence in you and helps get the deal done.

Also, as another side note, if the new management are raising funds from Banks or VC's they will almost certainly want to see some ongoing commitment from the previous management.

I hope this helps everyone. If there are any more questions you consider I can help with or give an opinion on, please ask away.

As a final note - please note, I am from the UK, so it is possible that in your part of the world, things are different / different terminology is used.

kind regards

~ midascode ~

 

Maybe I can join this thread and get some advice. Let's say I have a website that I think is worth $50,000 or thereabouts (as in midascode's example). It seems too small to bother with a business broker but too large to sell on DP (what would the paypal fees be ). How would I go about investigating a potential sale?

 

I wouldn't say $50K is too large for DP. I'd list it in SP too just to be ensure it gets the coverage. I've known of several sites in that range which have sold here and I've bought sites like that on SP. In fact, if you look at my posting history, you'll find WTB posts for the larger businesses - and I get a good response to those.

1. Bear in mind you'll get posers who don't have $50 posting in your thread. It happens in most threads and it would be up to you to weed the jokers out from the Aces.

2. You wouldn't be using Paypal for a transaction like that. You'd use escrow. Choose your escrow company safely..

3. You're right in that brokers won't rush for a $50K instruction. You're better off listing it yourself. Prowl through threads and you'll be able to identify one or two of the more cash rich members here. Boasts about $500K are obviously less valuable than completed transactions at $50K Make private contact with them. Have a chat by PM/email. For example, midascode was a good contact for me here and we've taken our chats to email.

Good luck.

 

Like Foggy says, when you get to these kinds of sums, you are best using an Escrow service.

Indeed, for much larger purchases, I might well employ lawyers and have contracts drawn up - but bearing in mind that you often live in a different jurisdictions to the seller, this is not always an easy thing to do. (Well, actually it is not that difficult - but it sure is more expensive)

Funny enough, in my example, the seller only lived 15 miles away (25 km) - so I may well have turned up at his offices with a bankers draft and we would have "walked" each other through the process of pushing the domain from his account to mine.

Sometimes, you don't have to "travel" half way round the world to do a deal

That said, if a site or a web business really interested me and it was for significant money, I would most likely jump on a airplane and go meet the seller .. but then I do like an "excuse" to travel.

 

I'm internet business broker. It depends on the size. The larger your website more you can ask. 10X rule is really for smaller sites. Contact me for more details.

 

I'm impressing this thread has been going on for such a time. Many opinions to consider. Thanks!